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Chancellor Alistair Darling told the House of Commons on Tuesday afternoon that he would increase the individual personal tax allowance by £600 to £6035 for this financial year, benefiting all basic rate taxpayers under 65, at a cost of £2.7 billion.

This will mean that 22 million people on low and middle incomes will gain an additional £120 this year.

One-off increase 

The Chancellor said that 17. 4.2 million households will receive as much - or more than - they originally lost. The remaining 1.1 million households will see their loss at least halved.

In other words, 80 per cent of households are fully compensated with the remaining 20 per cent compensated by at least half.

Darling added that in addition 600,000 people on low incomes will be taken out of tax altogether. The increased personal allowance will apply to all income for this tax year and will be backdated to 6 April.

As a result, from September basic rate taxpayers will see a one-off increase in their monthly income of £60 and then an increase of £10 per month for the rest of the financial year.

Darling claimed that higher rate taxpayers were largely unaffected by the reforms announced last year and said that it was therefore fair to focus additional support on basic rate taxpayers only.

As the £600 increased personal allowance applies not just to basic rate taxpayers but also to those paying tax at a higher rate, however, he said he would be reducing the threshold at which an individual starts to pay tax at the higher rate by £600.

Financed through borrowing

The net effect of these changes is that the tax liability of everyone that currently pays tax at 40 per cent will be unaffected by the increase in the personal allowance. For those brought into the higher rate, they will gain by up to £120 this year.

Darling explained that he would propose legislate for these changes in this year's Finance Bill so that taxpayers will get the benefit of this change from September.

He repeated his claim made on Budget Day that it is right and sensible to allow borrowing to rise and investment to be maintained as the economy slows.

“Debt is lower than in the past and low by international standards. Our fiscal policy, like our monetary policy, is designed to support stability in these uncertain economic times generated by the turbulence in world financial markets and global commodity price inflation,” the Chancellor said.

He said that he was able to finance his proposal through borrowing this year so that no money would be taken out of the economy at this time.

“I will, of course, set out my fiscal projections and decisions in the Pre-Budget Report as usual, consistent with the fiscal rules and in line with the requirements of the Code for Fiscal Stability,” Darling added.

“For future years our aim is to continue the same level of support for those on lower incomes and I shall bring forward proposals to do this at the Pre-Budget Report,” he concluded.

Short-term gimmick 

Shadow Chancellor George Osborne accused Darling of cynicism and panicking in the face of the Crewe and Nantwich by-election. Liberal Democrat Vince Cable called the Chancellor’s proposal a “short-term gimmick”.

Labour MP Frank Field, the ex-minister who headed a rebellion of backbench MPs against the abolition of the 10p tax rate, said he welcomed the announcement and apologised to Prime Minister Gordon Brown over personal remarks he had made in an interview on Sunday.

The trade unions, responsible for donations representing 70 per cent of Labour Party spending, welcomed the changes proposed by the Government.

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Related links

• HM Treasury